*2957 In an exchange of a definite part of petitioners' holdings of stock in a bank, going out of business, for a definite amount of stock in another bank which then had a market value, and for "certificates of shares" in a liquidating company, which certificates later in the taxable year proved to be worthless and were sold for $1, petitioners suffered a deductible loss to the extent of the cost of their original stock, less the value of stock received plus the $1 received for those certificates.
*1341 This is an appeal from the Commissioner's determination of deficiencies of $1,863.17 and $2,378.33 against the petitioners, respectively, for the calendar year 1921, and presents but one issue for the determination of the Board, as follows:
Whether the petitioners sustained a deductible loss of $23,624 in 1921, as the result of certain transactions between the Security National Bank, the Southwest National Bank and the Liberty Investment Company, a corporation, all of Dallas, Texas.
*1342 FINDINGS OF FACT.
The petitioners were community owners, in*2958 the spring of 1921, of 210 shares of the capital stock of the Security National Bank (hereinafter designated as Security Bank) which they had acquired subsequent to March 1, 1913, at a cost of $150 per share, or, in all, $31,500.
In the summer of 1921, the Security Bank became involved in financial difficulties so great that the national bank examiners condemned three-quarters in amount of its total book assets and directed that remedial action be taken.
To meet the emergency, the Southwest National Bank (hereinafter designated as Southwest Bank), was organized and under an agreement entered into on the 19th day of July, the Security Bank, by authority of its board of directors, sold, assigned, and agreed to deliver to the Southwest Bank any and all of its assets of every kind and description, except its corporate name and charter, and the necessary legal formalities to validate such delivery were authorized. This action was ratified by the stockholders of the Security Bank at a meeting held October 6, 1921, and the voluntary liquidation of the bank was directed.
Under the agreement of July 19, the Southwest Bank bought all of the assets of the Security Bank except its corporate*2959 name and charter, and as consideration for such purchase, it assumed all the liabilities of the Security Bank, except its liability to its shareholders. From such assets so purchased, the Southwest Bank agreed to select sufficient to equal in amount the liabilities of the Security Bank which it had assumed. The Southwest Bank agreed also to set up on its books a credit to the amount of $500,000 to the account of the shareholders of the Security Bank, to be used by those shareholders for the purpose of purchasing stock in the Southwest Bank at par in that proportion which the sum of $500,000 bore to the entire capital of the Southwest Bank; this stock, if and when issued to the individual shareholders, to be so issued in the same proportion which their holdings of stock in the Security Bank bore to the entire capital of the Security Bank. For this credit the Southwest Bank was to reimburse itself by selecting from the assets received by it from the Security Bank a second amount sufficient to equal in value the $500,000 set up in its books, as above, to the credit of the shareholders of the Security Bank. After these selections had been made, the Southwest Bank agreed to make a third*2960 selection of assets, amounting to $500,000 in value, which was to become its own property, as an additional consideration for its assumption of the liabilities of the Security Bank, and for other services performed and to be performed in connection with the liquidation of the affairs of *1343 the Security Bank. The Southwest Bank agreed that after these various selections had been made, it would deliver all the remaining assets of the Security Bank to the Liberty Investment Co., or any other duly appointed liquidating agent, for the use and benefit of the shareholders of the Security Bank, subject, however, to a lien held by one R. W. Higginbotham upon the proceeds of the assets of the Security Bank first liquidated after the setting up on the books of the Southwest Bank (through and by means of the selection and setting apart of assets of the Security Bank, sufficient in value to cover the selections) of the various sums theretofore enumerated in the contract.
This contract was carried out by the parties in interest, and under its provisions and intent, the petitioners surrendered their 210 shares of stock in the Security Bank and received in exchange therefor, on the basis*2961 of 4 to 1, 52 1/2 shares of stock in the Southwest Bank, and for their equity in the remaining assets turned over for liquidation to the Liberty Investment Co., a Texas corporation, they received a certificate of interest on the basis of 4 to 3, representing 157 1/2 shares of the total number of shares of the assets of the Security Bank conveyed to that corporation as liquidating agent.
The Southwest Bank was organized to a large extent with new capital, new management, new money, and new stockholders. All, or nearly all, of the incorporators of the Southwest Bank were the large stockholders in the Security Bank, but the proportion of the whole number was small, 20 or 25 out of about 500 who were stockholders in the Security Bank. A circular letter was sent to all the stockholders of the Security Bank giving them the opportunity to take as much as they wanted of the stock of the new Southwest Bank, but only a very few took any more than the amount to which they were entitled by exchange under the agreement of July 19, though all of the stockholders of the Security Bank received at least their pro rata interest in the Southwest Bank. The stock was then placed with other moneyed*2962 men who, it was thought, would be of help in the situation. Some of the directors of the Southwest Bank were directors in the Security Bank, but the president, vice president, and other chief officers were different persons.
The assets conveyed to the Southwest Bank were presumably worth dollar for dollar and its stock had a book value at the time of its organization of $125 per $100 share. Its fair market value when the petitioners' tax returns for 1921 were prepared was $150 per share. The certificates of the Liberty Investment Co. were of uncertain value, though the petitioners did not consider that the assets behind them had any value.
In December, 1921, the petitioners sold for $1 their certificate of interest in the assets of the Security Bank held by the Liberty Investment *1344 Co., as liquidating agent, and they claim as a deduction from gross income in 1921 an allowance in the sum of $23,624 ($11,812 each) as representing the loss sustained upon the sale of their interest in the Liberty Investment Co.
OPINION.
LOVE: The respondent, through his attorney, contends that under the facts above set forth, the petitioners have sustained no deductible loss under*2963 the Revenue Act of 1921, and cites the provisions of section 202 thereof, as follows:
(c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized.
* * *
(2) When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stock or securties in a corporation a party to or resulting from such reorganization. The word "reorganization" as used in this paragraph, includes a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or of substantially all the properties of another corporation), recapitalization, or mere change in identity, form, or place of organization of a corporation, (however effected);
* * *
(e) Where property is exchanged for other property which*2964 has no readily realizable market value, together with money or other property which has a readily realizable market value, then the money or the fair market value of the property having such readily realizable market value received in exchange shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of such basis, shall be taxable to the extent of the excess; but when property is exchanged for property specified in paragraphs (1), (2), and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, the money or the fair market value of such other property received in exchange shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of such basis, shall be taxable to the extent of the excess.
We do not agree with the conclusion at which the respondent has arrived. We are of the opinion that in this case it is clear that within the meaning and intent of section 202(c) there was in 1921 no reorganization, merger, consolidation, recapitalization, nor mere change*2965 in identity, form, or place of organization of the Security Bank.
The Security Bank found itself in grave financial difficulties in the spring of 1921, and went into voluntary liquidation; but it never was reorganized and it never lost its identity nor its independence by merger, consolidation or in any other manner until later it became defunct by inoperation.
*1345 The only witness was Cullen F. Thomas, one of the petitioners herein. Mr. Thomas is a lawyer and was one of the attorneys for the bank of which he was also a director and vice president. His character and his reputation for fairness, admitted in the record by the attorney for the respondent, are such that his testimony stands unchallenged; no attempt whatever being made on behalf of the respondent to rebut or discredit it.
From the record it appears that in the crisis confronting the Security Bank, precipitated by its financial difficuties, the directors decided to incorporate a new bank, the Southwest National, and to sell to it all the assets of the Security Bank except its corporate name and charter in consideration of the assumption by the new bank of all the obligations of the Security Bank, except*2966 its capital liabilities. This was done and in the agreement of July 19, between the two banks, this transaction is expressly designated as a sale of the assets of the Security Bank.
The transaction has none of the characteristics of a "reorganization" as defined in section 202(c) of the Revenue Act of 1921, or as that word is generally understood. No new capital, money or resources of any kind were contributed to it by its directors or other stockholders, nor was any attempt whatever made to revive an organization recognized as being in extremis; but a successor bank was created with a new charter, new capital and a new management, which engaged actively in the banking business; while the moribund Security Bank, having sold and disposed of all but its name, its charter, and its capital liability, was permitted quietly to breathe its last. The essential elements of a "reorganization" seem altogether to be lacking here; nor is that fact altered in our opinion, by the admission in the pleadings of the petitioners and in the testimony of Mr. Thomas that the Southwest Bank was organized "for the purpose of taking over the assets and liabilities of the Security National Bank and carrying*2967 on the banking business at said bank," and that "part of the plan was, of course, that the new bank would succeed to the depositors in the old." The old bank was deal and the Southwest Bank was a new bank.
Immediately after the organization of the Southwest Bank, the petitioners found themselves in this situation: They had disposed of their 210 shares of stock of the Security Bank which had cost them $31,500, and had received in their place 52 1/2 shares of the stock of the new Southwest Bank, and a certificate of some sort from the Liberty Investment Co. representing their equity (157 1/2 shares or parts) in those assets which had been conveyed for liquidation to that corporation as liquidating agent.
It is not clear, from the record, just what the above "certificate" was. In several places, references are made to it as a "stock certificate" or as *1346 a as a "certificate of stock" in the Liberty Investment Co. for 157 1/2 shares, but that does not appear to be its true nature, though the witness, Thomas, himself, occasionally so speaks of it. But from the fact that the first reference to it was as a "certificate of interest" in the three-fourths of the assets of the*2968 Security Bank that were turned over to the Liberty Investment Co., not in its own right but as "liquidating agent," and as its exact nature is not material to this issue, no violence will be done either to the petitioners or the respondent if we speak of it in that way.
At this point, then, the petitioners having parted with their 210 shares of stock in the Security Bank which had cost them, subsequent to March 1, 1913, at $150 per share, $31,500, were in possession, in place of them, of 52 1/2 shares of stock in the Southwest Bank, representing one-fourth of their former interest in the Security Bank, which stock had at that time a fair market value of $150 per share or $7,875; and a certificate of undetermined value, from the Liberty Investment Co., representing the cost to them of the remaining three-fourths of their former interest in the Security Bank, or $23,625, which they had not surrendered, but which had been placed with an agent for liquidation for their account and benefit. Clearly there had been so far neither "gain derived nor loss sustained," under the law by the petitioners through this transaction.
If the matter had stopped there we would have no alternative*2969 but to sustain the contention of the respondent, but it did not stop there. In December of the same year (1921) the petitioners sold for $1 their entire interest in the remaining assets of the Security National Bank held for their account, use and benefit by the Liberty Investment Co. as liquidating agent and represented by a certificate of that corporation for 157 1/2 shares or equal parts in such assets; claiming as a deductible loss in their income-tax returns for 1921, the difference between the cost to them, $23,625, of their undivided interest in such remaining assets, and the sum of $1 which they realized from the sale. We are of the opinion that the deduction is a proper one.
It is not of moment that after the Southwest Bank had made its selections from the assets of the Security Bank, those remaining which were turned over to the liquidating agent were regarded by the petitioners as being of no value whatever. The fact is that they had never until December, 1921, parted with their title to those remaining assets in such a way as legally to determine and establish their value. It is true that they formed a part of "all" the assets of the Security Bank that were sold*2970 to the Southwest Bank under the contract of sale of July 19, 1921; but that sale was made with certain reservations and stipulations clearly set forth in the contract under which the title to those assets "selected" by the Southwest *1347 Bank passed to it when the selections were made; but the undivided interest of the stockholders of the Security Bank in the assets remaining after those selections had been made and regregated never was lost to them pending some subsequent act. In the instant case that subsequent act was consummated in the sale by the petitioners of all their right, title and interest in such remaining assets for the con-consideration of $1, in December, 1921.
The respondent contends further that these petitioners are barred from claiming this loss (the reality of which is nowhere denied) as legally deductible by the language of section 202(e) of the Revenue Act of 1921, supra. We are not of that opinion. The respondent contends that the admitted and undisputed opinion and belief of these petitioners that these remaining assets were without a readily realizable market value at the time that the Southwest Bank was created and their continuing interest*2971 in those assets turned over for liquidation to the Liberty Investment Co., preclude them from claiming a lawful loss when their interest in those assets was disposed of and the amount of their loss actually determined thereby; but the fact here is that by the sale in December, 1921, of their entire interest in these remaining assets, these petitioners did "realize," determine, and sustain an actual loss of $23,624 in amount.
We find for the petitioners in the full amount of their claim.
It appears from the record that an error of some kind, the nature and effect of which is not apparent, was made in the preparation of the petitioners' income-tax returns for 1921. This will be corrected in the recomputation of the tax.
Judgment will be entered under Rule 50.